It might surprise you to hear that small businesses in Australia are not covered by the National Credit Act, which was designed to protect consumer credit activities. So unfortunately, it means there is little protection offered to SMEs when it comes to using credit in business and that means you need to be especially diligent when choosing business banking products.
The exclusion from the National Credit Act means there are no caps on interest rates or fees for small businesses and it also means that the lending contracts govern the relationship, so these documents need careful scrutiny before you sign away.
Small and medium business owners usually need a few different banking products to help them establish and run a successful business. How much you pay depends on many factors, however, recently, banks have moved towards securing banking lines with personal property and real estate.
Bearing in mind you are not protected by the National Credit Act, it is worth weighing up the various products and the benefit of offering personal securities before you jump in and put your home on the line to get a better banking deal. This will ensure you’re getting the best value, matched with the most appropriate security, given your personal circumstances. When you’ve weighed up this situation before you walk into a bank, you’ll be in a much better position to negotiate with your bank for a better deal and get a product that suits you best.
It doesn’t matter whether you’re a shoe supplier or a coffee shop, you’re going to have a need for a bank account and possibly a loan, credit card or overdraft at some stage. The most common types of banking products SMEs use for funding are:
- Business Loans;
- Overdrafts;
- Bank Guarantees;
- Leasing lines; and
- Credit Cards.
In the past, banks have been quite document-focused when an SME applied for any type of loan or credit product. They’ve wanted to see thorough documentation for your business performance, both past and present, supported by BAS and tax returns, as well as business plans and signed agreements.
In an age of ‘low doc’ convenience, meaning low documentation, many banks have moved towards taking your family home as security against money you borrow, but the financial benefit versus the risk doesn’t always add up.
To put your home on the line, you would want to be getting a fantastic interest rate with heavily reduced fees and charges and unfortunately, that’s not the case with some current secured loans for business owners. You might be wondering why business owners would agree to that kind of deal, but remember, most business owners are so busy in the daily operations of their own business that they often look for the easiest option, so it really pays to do your research and have the right documentation so you can negotiate the best deal.
Business performance is always the key to the price the financial institutions want to charge you. The better the performance, the lower the risk to the bank and consequently the better the price should be for you, with a lower interest rate and comparatively lower fees and charges. Make the effort to collect and provide thorough business performance documentation and use it as leverage to secure a better rate or deal.
When assessing the cost of a line of credit it is also important to count the full cost you are being charged. Don’t ignore the fees and charges as they often add up to a substantial sum. Most banks now list fees and charges on their websites so you can easily compare different products between different lenders and the investment of your time might just save you a few hundred dollars each year, which could have you paying off the loan years earlier.
One of the easier options if you don’t want to get stuck into the nitty gritty but you do want the best deal, is to call upon an experienced consultant, agent or broker, who will do the research and find a suitable product or matrix of products for your business. They will put on their game face and handle the negotiating for you, which is great if you’re not confident of negotiating or asking for a better deal.
This can be a great strategy for startups and for businesses whose direction or size has evolved so their banking circumstances no longer suit the business operations. It’s at this stage that businesses often need more support and more access to credit, yet the daily operations of the business have picked up so much so that there is little time to undertake due diligence research – and that’s when business owners get lulled into the false security of offering their house as security. It’s ok when business is booming but if the business slows down or takes a step backwards, it can have huge personal financial ramifications.
As with most business transactions you should never underestimate the importance of the relationship with your banker. Regular honest communication is always the best, even if the news isn’t good. The better your banker understands your business and the circumstances in which it operates, the better equipped they will be to assist and support you.
You might not consider yourself a financial whizz, after all it’s probably not your core business, but if you can take the time to do the research and compare a selection of three or four banks before you sign any documents or outsource your negotiation needs, you will be in a much stronger financial position to focus on the growth of your business.
–Greg Heaney is Director, Itas Consulting.
